Insider Trading Madness: Rule 10b5-1 and the Death of Scienter
Carol B. Swanson
Hamline University - School of Law
January 1, 2003
University of Kansas Law Review, Vol. 52, p. 147, 2003
This article explores Rule 10b5-a and insider trading’s scienter requirement, concluding that the SEC made a fundamental misstep when it promulgated this new definition. Beginning with a brief overview of the relevant regulatory regime, Part II explores deceptive intent as a centerpiece of Rule 10(b), the renowned catchall provision for securities fraud. The analysis then moves into the strange world of insider trading, beginning with an overview assessment of this odd offense and its confusing and controversial policy implications, especially given today’s volatile business and legal climate. To provide meaningful contrasts, the article then surveys the strict liability insider trading prohibitions outside Rule 10b-5. Finally, the background analysis probes the important use-possession dichotomy as federal circuits clashed in the late 1990s over whether Rule 10b-5 liability should attach when the trader merely possesses inside information or whether that trader must actually make use of the information. Given that backdrop, the article then presents Rule 10b5-1 itself, the SEC’s mechanism for resolving the use-possession debate, including the agency’s rationale for selecting the awareness standard and the reaction of business law commentators to its contours. On balance, this article concludes that Rule 10b5-1 oversteps the natural limits of Rule 10(b) by imposing liability for corporate misconduct that does not equate to fraud.
Number of Pages in PDF File: 63
Keywords: Insider trading, Rule 10b, scienter, fraud, liability, SECAccepted Paper Series
Date posted: March 2, 2013
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